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Power Concern Offers California a Secret Deal

Duke Energy, a power-generating company accused of overcharging customers millions of dollars during California's year-old energy crisis, has secretly offered Gov. Gray Davis a deal that it hopes will solve its legal problems while helping to calm the state's chaotic electricity markets.

The proposed settlement, outlined in documents prepared in March by Duke's lawyers, calls for an end to various state investigations, private lawsuits and state complaints to federal authorities accusing Duke of overcharging.

In return, Duke would make an unspecified ''appropriate payment'' but admit no wrongdoing.

''Duke is committed to sharing pain'' and ''expediting high-level confidential discussions that would embrace the governor's political and public relations needs,'' according to the documents, which were given to The New York Times by someone who wanted the issue aired publicly.

Governor Davis acknowledged the secret discussions in an interview in San Francisco yesterday, and said he hoped to meet with more generators soon. But he insisted that none of the companies would escape a substantial payment because, he said, they have penalized the state with excessive prices.

''My general approach to the energy companies is that you have already charged the utilities a 50 percent credit penalty for the power they were buying from you,'' Mr. Davis said, so ''you're going to have to have a very substantial reduction'' in what the companies are owed.

Mr. Davis said Duke had walked in with ''a number of demands,'' including an end to state inquiries but that that was not likely to happen.

''We're not about to call off the dogs,'' said the governor, a Democrat who will seek re-election next year.

Duke, based in Charlotte, N.C., is a major investor in California's wholesale electricity market, having spent more than $1 billion since the state opened its generating plants to outside operators in 1996.

It is also near the top of the list of companies accused of overcharging. Duke has been ordered by federal regulators to justify or refund $20 million in disputed charges this year, an amount that is third-highest among federally regulated companies in the California market.

By entering secret negotiations with Mr. Davis and being the first generator to settle, Duke could gain a public-relations advantage, in much the same way that the Liggett Group donned a white hat by being the first company to open talks with the state governments in the tobacco-litigation wars.

''We've just simply tried to be part of the solution,'' Richard B. Priory, Duke's chairman and chief executive, said in an interview, adding that the company was ''offering ideas'' and ''throwing in suggestions.''

Publicly, Mr. Davis has disparaged out-of-state electricity generators before and after he began talking with them privately. In an interview two weeks ago with The Los Angeles Times, he called the generators ''the biggest snakes on the planet Earth'' for their pricing practices.

California's electricity costs have risen to about $28 billion last year from $7 billion in 1999. By some estimates, they could approach $70 billion this year -- $2,000 for every resident. The state has stepped in to buy power for financially crippled utilities, including Pacific Gas and Electric, which is now in bankruptcy court.

The Davis administration has struck power deals with companies like Duke in hopes of securing a stable and affordable source of power. To pay those bills, Mr. Davis is seeking the largest municipal bond issue in American history, $12 billion, although some state officials privately estimate that the final amount will be higher.

The governor hopes the bond issue will eventually take the state's taxpayers off the hook. But how those costs are allocated among ratepayers, utilities and generators, and whether the bond issue can even succeed, remain unanswered questions. A major impediment to resolving the electricity crisis, according to state officials, utility executives and economists, is the secrecy surrounding the administration's negotiations.

Several Republicans have sued the Davis administration to learn the terms of specific contracts entered into by the state. On Monday, the administration released a 67-page financial analysis, including its most detailed disclosure about the overall costs of state electricity contracts. Last week Republicans blocked legislation that Mr. Davis says he needs to pass the bond issue. The bill could come up for a vote later this week.

''The thing that has hindered Governor Davis the most among the legislative ranks is the demand for secrecy over the negotiations and the agreements that have been reached,'' said Senator Joseph L. Dunn, a Democrat from Santa Ana and the chairman of a select committee investigating the price spikes.

Mr. Davis, in the interview, said there were legitimate commercial reasons for keeping contract terms confidential.

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The political uncertainty has spilled over into the markets, where the bonds would have to be sold. The state's credit rating, while still solid, is slipping.

Already companies that do business with California, like Duke, are citing the state's creditworthiness as a reason for charging higher prices in their dealing with the state, though the state has stepped in as buyer since February.

The Federal Energy Regulatory Commission recently ordered generators to justify high prices in California this year or pay $125 million in refunds. The companies -- including Duke, Reliant Energy, Dynegy Inc. and the Williams Company -- deny any wrongdoing and cite the state's credit situation as one reason for the high prices.

Mr. Priory, the Duke chairman, said that resolution of credit issues would lead his company to drop the so-called ''credit premium'' it now charges on power sales. As of March 7, Duke was owed more than $100 million by the state's power managers, documents show.

In its confidential submission to Mr. Davis and his aides, Duke said it would ''forgive an appropriate amount of certain receivables, or make an appropriate payment based upon a methodology that fairly represents its share of alleged overcharges.''

The documents do not give an amount, but Duke's 2000 annual report shows that its wholesale energy division had written off $110 million for power sales to California that had not been collected. (Even with that write-off, the unit's profits before taxes doubled from 1999 to 2000, and quadrupled for the first quarter of this year.)

Duke's ''preliminary global settlement template'' of March 9 goes on: ''Duke is committed to sharing pain with state and others on a fair and equitable basis, without admitting legal liability, because Duke has done nothing illegal.''

Duke says that much of its California power was sold last year on the forward markets, not the more volatile and higher-priced spot markets. But Mr. Priory also noted in his interview that at least 10 percent was sold for ''whatever the market price is.''

On March 23, Duke's lawyer, at the request of Mr. Davis's legal affairs secretary, forwarded to the governor's office additional information about pending litigation involving Duke and its power sales in California. The documents show that a top Duke priority is the ''prompt suspension of state investigations, lowering of rhetoric and stay of state litigation,'' as well as the withdrawal of state-related claims at the federal energy commission.

Also in March, the operators of the state's power grid told the Federal Energy Regulatory Commission that wholesale electricity prices in California were more than $6 billion above competitive prices over the previous 10 months. Duke has questioned the methodology of that submission and wants the claim withdrawn.

The inquiries of concern to Duke include those being conducted by the office of the attorney general, William Lockyer, and the California Public Utilities Commission.

Barry P. Goode, the governor's legal affairs secretary, says he subsequently referred Duke's lawyer to the attorney general's office. The two state agencies say that their inquiries are continuing. Sandra Michioku, a spokeswoman for Mr. Lockyer, said, ''Our investigation is ongoing.''

Loretta Lynch, the president of the utility commission, said in a telephone interview yesterday, ''The public utilities commission has not been involved in any settlement discussions with generators and our investigations into overcharges and withholding are ongoing and strong.''

The Duke documents say the company should be given preferential treatment for its conciliatory stance.

Other generators said they were not involved in settlement discussions with Mr. Davis.

About This Report

This article is part of a joint reporting effort with the PBS series ''Frontline,'' which will broadcast a documentary about California's energy crisis on June 5.